The March quarter earnings season was a disappointment and a cyclical recovery will be seen only from the third quarter of this year, says Anish Damania Head-Institutional Equities, IDFC Securities, in an interview to CNBC-TV18.
“There are pockets of recovery, but not well spread. It will take another two or three quarters for a broad-based recovery,” he says.
He expects the Nifty to be rangebound between 7900-8500 over the next couple of quarters and says better than expected earnings growth will be key to the Nifty testing the record highs seen in March this year.
He expects the earnings growth to pick up from the third quarter onwards partly because of the low base effect.
He recommends investors to buy Tech Mahindra shares on every weakness as the company’s earnings growth will pick up from the next quarter onwards. Among FMCG stocks, he is bullish on Dabur and Marico . He is also watching the earnings of United Spirits for signs of imporvement in the company’s financials.
He expects some pain for two-wheeler stocks near stocks, but feels that would be a good buying opportunity for long term investors.
Sonia: What have you made of the earnings seasons so far and has there been any bright spots that investors can increase their exposure into?
A: If I look at the earnings, there are couple of bright spots or maybe three bright spots. One is clearly in the oil and gas segment, we have seen some bright spots with the gross refining margins (GRMs) which is improving sharply and has led the oil marketing companies (OMCs) companies to do a little better. Second is in the pharma space where we have seen earnings upgrades coming across the board.
The third thing is in some pockets of consumers where we have started to see a little bit better than expected volume growth and the recent result declared by Jyothy Laboratories was one such instance. So, we have seen some bright spot. However, on the whole this result season has been a damp squib. It was expected that things are going to be not that great in this quarter and that is how it has turned out to be.
However, in terms of more disappointment, the PSU banks have disappointed a lot more than what the expectations were. So, that is where a lot of struggle is coming up. We have few more results coming up over the next few days but it looks like the trend is a little weaker.
Reema: What does this earning season tell you about the cyclical recovery because on one hand you have got a few industrial stocks like a Punj Lloyd and Voltas which came out with a fairly good set of earnings but on the other hand cement volumes and realisations continue to remain under pressure even in this January to March quarter? Where are we in this cyclical recovery cycle and when can we expect an uptake?
A: In the recovery phase we are seeing a scraping of the bottom for a while now and that is what is happening. I do not see a significant deterioration but I do not see a big uptake as well in the last six months. Overall I would say that a slow inflation will make its impact over the next two quarters and the cyclical recovery will probably start coming out in its earnings growth from quarter III onwards.
I would say that there are pockets of recovery which are happening but they are not well spread across the board. It will take another two quarters at least for things to happen.
Sonia: Today is a very heavy day of earning, we have a lot of largecaps like Tech Mahindra, Tata Motors, Bharat Heavy Electricals (BHEL), United Spirits coming out with numbers and also some well traded midcaps such as Dish TV and Thermax etc. Do you expect a positive surprise anywhere and any stock that you have been bullish on?
A: We are not expecting any huge positive surprises. However, I would want to watch out for United Spirits numbers because that is something where the stock trades are way rich on valuations. While not much is expected but there is always a hope that something could come about there. So, that is something where I would watch out for. Rest it is going to be more or less inline with expectations or little worse.
Reema: What are your thoughts on Tech Mahindra ahead of its earnings because its revenue growth is expected to be strong but margins could be under pressure and are anyway much lower than its peers? What is the street’s focus on Tech Mahindra going to be? Will it be on the topline or will it be on the weak margins?
A: Both the topline as well as the margins are some of the key drivers of tech stocks. If you see, there has been strong headwinds with respect to the currency movements for Tech Mahindra especially when its exposure in the Europe and UK has been on the higher side than its other counter parts. Its volume growth is expected to remain a little stronger than rest of the peers so the stock has also corrected significantly from its peak.
It is already factoring in the fact that the worst is probably there in the price. We would focus now on how it is going to do from hereon. So, maybe there will be one more quarter of mix numbers in Tech Mahindra but after that we would see the earnings traction continue. So, we would recommend investors to buy that stock.
Sonia: What is your overall view on the market itself? Is there any positive trigger that could take the Nifty out of this range of 8,350-8,450, at least by the time the first half of the year is out?
A: What we saw last year was that the first two quarters are very strong in earnings growth and were followed by huge disappointments in the third and the fourth quarter. So the third and the fourth quarter pace is particularly very low and the first two quarters therefore will show tepid numbers and that is probably what is expected.
On a lower base, even without a big cyclical recovery we are going to see a much better earnings growth coming up. So, to that extent I would say that purely by the fact that the earnings growth will look a lot better than what it has over the last four quarters. Where we go into the third quarter of this year we should start seeing the market move out of this range. Till that time the market will continue to be in this 7,900-8,500 kind of a range for a while.
Reema: Going back to our earlier highs of a little more than 9,000 on the Nifty, does it look difficult in this calendar year?
A: It is quite possible if the expectation that the earnings will grow from third quarter onwards, starts coming through. There is more likelihood that we might see Nifty gain again by the end of this year.
Sonia: You were referring to couple of consumer companies like Jyothy Laboratories that have reported strong earnings this quarter. Any thing else in the consumer space that caught your attention, that deserves higher prices purely because of good quality earnings this quarter?
A: Both Dabur and Marico in that space have done well and so has Jyothy Laboratories. Even in case of Hindustan Unilever (HUL), their earnings were little better than what most expected so there also have been some volumes surprise. Overall as we go into the next few quarters for the bigger companies because the inflation has been falling, you will start seeing the impact of the sales growth also coming down as the nominal gross domestic product (GDP) starts impacting the sales growth of these consumer companies.
Overall what we would see is that the consumer companies as such may not be that attractive in terms of growth numbers as we go forward. Given the fact that there could be limited choices to look at, consumer companies will still do okay even if the volume growth tapers off.
Reema: What are your thoughts on the two-wheeler earnings that we saw from Hero Motocorp, Baja Auto as well as TVS Motors and did they offer you any ideas to buy at current levels?
A: Two-wheelers is a very cyclical business in that sense but the cyclicality is a lot lower and a lot more shallow. What I have seen over the past 20 years of tracking this industry is the fact that two-wheelers are more resilient to a slowdown than any other auto makers. Typically what we have seen is the last six months have been very slow. If we go by history then it might stay for another six months but these are the times when you need to buy these two wheelers stocks because now the multiples have corrected and even the stocks have corrected significantly. Over the next 6 months it will be an opportunity for very long-term holders to look at these stocks.
Sonia: From a markets point of view, how would you rate the one year of the government and what more would you expect to hear and see from the government for the markets to move higher?
A: What the market wants probably is clarity on lot of issues and how things are going to forward. If you look, there are quite a few things which they have done, so they completed the coal auctions, there have been some hiccups in passage of some laws like the land bill and the goods and service tax (GST). If that gets cleared soon there will be some fillip to the market, Overall what I would say is that one year is too short to know how the government has done but incremental steps which they have taken so far are okay.